NOTE 10—PENSION AND POSTRETIREMENT BENEFITS

Although we currently provide retirement benefits for most of our U.S. employees through sponsorship of the McDermott Thrift Plan (see “Defined Contribution Plans” below), some of our longer-term U.S. employees and former employees are entitled to retirement benefits under the McDermott (U.S.) Retirement Plan, a non-contributory qualified defined benefit pension plan (the “McDermott Plan”), and several non-qualified supplemental defined benefit pension plans. The McDermott Plan and the non-qualified supplemental defined benefit pension plans are collectively referred to herein as the “Domestic Plans.” The McDermott Plan has been closed to new participants since 2006, and benefit accruals under the McDermott Plan were frozen completely in 2010.

We also sponsor a defined benefit pension plan established under the laws of the Commonwealth of the Bahamas, the J. Ray McDermott, S.A. Third Country National Employees Pension Plan (the “TCN Plan”) which provides retirement benefits for certain of our current and former foreign employees. Effective August 1, 2011, new entry into the TCN Plan was closed, and effective December 31, 2011, benefit accruals under the TCN Plan were frozen. Effective January 1, 2012, we established a new global defined contribution plan to provide retirement benefits to non-U.S. expatriate employees who may have otherwise obtained benefits under the TCN Plan.

Retirement benefits under the McDermott Plan and the TCN Plan are generally based on final average compensation and years of service, subject to the applicable freeze in benefit accruals under the plans. Our funding policy is to fund the plans as recommended by the respective plan actuaries and in accordance with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or other applicable law. The Pension Protection Act of 2006 (“PPA”) amended ERISA and modified the funding requirements for certain defined benefit pension plans including the McDermott Plan. Funding provisions under the PPA accelerated funding requirements are applicable to the McDermott Plan to ensure full funding of benefits accrued.

	Domestic Plans						TCN Plan
	Year Ended December 31,						Year Ended December 31,
	2015			2014			2015			2014
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	556,632		$	583,421		$	43,985		$	40,396
Interest cost		21,613			26,972			1,626			1,900
Actuarial loss (gain)		(21,754	)		36,885			(4,095	)		4,438
Terminated Vested Employees Lump-Sum Settlement		-			(54,551	)		-			-
Benefits paid		(37,292	)		(36,095	)		(3,251	)		(2,749	)
Benefit obligation at end of year		519,199			556,632			38,265			43,985

Change in plan assets:
Fair value of plan assets at beginning of year		551,821			567,801			42,106			43,483
Actual return on plan assets		(21,889	)		73,114			(598	)		1,372
Company contributions		1,506			1,552			-			-
Terminated Vested Employees Lump-Sum Settlement		-			(54,551	)		-			-
Benefits paid		(37,292	)		(36,095	)		(3,251	)		(2,749	)
Fair value of plan assets at end of year		494,146			551,821			38,257			42,106
Funded status	$	(25,053	)	$	(4,811	)	$	(8	)	$	(1,879	)

Amounts recognized in balance sheet consist of:
Other Assets	$	-		$	12,685		$	-		$	-
Accrued pension liability—current		(1,409	)		(1,519	)		-			-
Pension liability		(23,644	)		(15,977	)		(8	)		(1,879	)
Accrued benefit liability		(25,053	)		(17,496	)		(8	)		(1,879	)
Net (Liability)/ Asset	$	(25,053	)	$	(4,811	)	$	(8	)	$	(1,879	)

(1)

During 2014 we offered our former employees with vested pension benefits under the McDermott Plan a one-time voluntary opportunity, for a six-week period, to receive the value of their pension benefit as a lump-sum payment. This program resulted in approximately $55 million release of pension liability and a corresponding decrease in plan assets.

	Domestic Plans				TCN Plan
	Year Ended December 31,				Year Ended December 31,
	2015		2014		2015		2014
	(In thousands)
Supplemental information:
Plans with accumulated benefit obligation in excess of plan assets
Projected benefit obligation	$	519,199	$	556,632	$	38,265	$	43,985
Accumulated benefit obligation		519,199		556,632		38,265		43,985
Fair value of plan assets		494,146		551,821		38,257		42,106

Assumptions


	Domestic Plans						TCN Plan
	2015			2014			2015			2014
Weighted average assumptions used to determine net periodic benefit obligations at December 31:
Discount rate		4.2	%		4.0	%		4.00	%		3.80	%
Rate of compensation increase	N/A			N/A			N/A			N/A

	Domestic Plans									TCN Plan
	Year Ended December 31,									Year Ended December 31,
	2015			2014			2013			2015			2014			2013
	(In thousands)
Supplemental information:
Components of periodic benefit cost:
Interest cost	$	21,613		$	26,972		$	23,996		$	1,626		$	1,900		$	1,867
Expected return on plan assets		(26,707	)		(27,501	)		(38,306	)		(2,840	)		(2,961	)		(2,602	)
Actuarial loss (gain)		26,842			(8,728	)		22,002			(657	)		6,027			(10,822	)
Net periodic benefit cost (gain)	$	21,748		$	(9,257	)	$	7,692		$	(1,871	)	$	4,966		$	(11,557	)

Weighted average assumptions used to determine net periodic benefit cost:
Discount rate		4.00	%		4.80	%		4.00	%		4.00	%		4.80	%		4.00	%
Expected return on plan assets		5.00	%		5.00	%		6.50	%		6.90	%		6.90	%		6.90	%
Rate of compensation increase	N/A			N/A			N/A			N/A			N/A			N/A

Expected Long-Term Rate of Return—Our expected long-term rate of return as of December 31, 2015 on the Domestic Plan was adjusted to 4.2% from 5% due to market changes and on the TCN Plan was adjusted to 4.7% from 6.9% to reflect changes in the market conditions and plan asset mix. Our long-term rates of return reflect the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In setting the long-term assumed rate of return, we consider capital markets future expectations and the asset mix of the plans’ investments. Actual long-term return can, in relatively stable markets, also serve as a factor in determining future expectations. We consider many factors that include, but are not limited to, historical returns on plan assets, current market information on long-term returns (e.g., long-term bond rates) and current and target asset allocations between asset categories. The target asset allocation is determined based on consultations with external investment advisers. However, any differences in the rate and actual returns will be included with the actuarial gain or loss recorded in the fourth quarter when our plans are remeasured.

Investment Goals

General

The investment goals of the McDermott Trust and the trust underlying the TCN Plan (“TCN Trust”) are generally to provide for the solvency of the respective plans and fulfillment of pension obligations over time, and to maximize long-term investment return consistent with a reasonable level of risk. Asset allocations within the McDermott Trust and TCN Trust are reviewed periodically and rebalanced, if appropriate, to ensure the continued conformance to the investment goals, objectives and strategies. Both the McDermott Trust and the TCN Trust employ a professional investment advisor and a number of professional investment managers whose individual benchmarks are, in the aggregate, consistent with the applicable trust’s overall investment objectives.

The specific goals of each investment manager are set out in the investment policy adopted by the investment committee for the respective trust, but, in general, the goals are (1) to perform in line with (in the case of passive accounts) or outperform (for actively managed accounts) the benchmark selected and agreed upon by the manager and the trust, and (2) to display an overall level of risk in its portfolio that is consistent with the risk associated with the agreed upon benchmark. The estimated allocations discussed below are periodically reviewed to assess the appropriateness of the particular funds in which they are invested, and these estimated allocations are subject to change.

The performance of each investment manager’s portfolio is periodically measured against commonly accepted benchmarks, including the individual investment manager’s benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to discipline and other qualitative factors that may impact the ability to achieve desired investment results.

The following is a summary of the asset allocations at December 31, 2015 and 2014 by asset category.

	Domestic Plans						TCN Plan
	2015			2014			2015			2014
Asset Category:
Fixed Income		85	%		85	%		49	%		28	%
Equity Securities		15	%		15	%		51	%		72	%
Total		100	%		100	%		100	%		100	%

In December 2015 asset allocations within the TCN Plan were reviewed and the decision was made to change the allocation of assets during 2016 to be 70% fixed income and 30% equity securities. At December 31, 2015 $14 million of TCN plan assets were held in cash in cash equivalents.

Fair Value

The following is a summary of total investments for our plans, measured at fair value at:

	December 31, 2015
	Level 1		Level 2		Level 3		Total
Pension Benefits:	(In thousands)
Fixed Income	$	60,128	$	356,107	$	5,752	$	421,987
Equities		85,065		12		-		85,077
Cash and Accrued Items		25,335		4		-		25,339
Total Investments	$	170,528	$	356,123	$	5,752	$	532,403

	December 31, 2014
	Level 1		Level 2		Level 3		Total
Pension Benefits:	(In thousands)
Fixed Income	$	64,575	$	402,116	$	5,013	$	471,704
Equities		109,781		486		-		110,267
Cash and Accrued Items		11,956		-		-		11,956
Total Investments	$	186,312	$	402,602	$	5,013	$	593,927

Changes in Level 3 Instrument

The following is a summary of the changes in our Level 3 fixed income instruments measured on a recurring basis:

	December 31,
	2015			2014
	(In thousands)
Balance at beginning of period	$	5,013		$	3,769
Purchases, net		1,269			1,347
Total unrealized loss		(530	)		(103	)
Balance at end of period	$	5,752		$	5,013

Cash Flows

Cash Flows
	Domestic Plans		TCN Plan
	(In thousands)
Expected employer contributions to trusts of defined benefit plans:
2016	$	-	$	-
Expected benefit payments:
2016	$	37,190	$	8,993
2017		36,939		2,341
2018		36,715		2,394
2019		36,373		3,580
2020		36,019		2,674
2021-2025		173,293		11,113

Defined Contribution Plans

We provide retirement benefits for most of our U.S. employees through the McDermott Thrift Plan, a qualified defined contribution plan with a Code section 401(k) feature (the “Thrift Plan”). The Thrift Plan generally provides for matching employer contributions of 50% of participants’ contributions up to 6% of compensation and unmatched employer cash contributions equal to 3% of participants’ base pay, plus overtime pay, expatriate pay and commissions, which we refer to collectively as “thriftable earnings.” Amounts charged to expense for employer contributions under the Thrift Plan totaled approximately $4 million, $4 million and $6 million in 2015, 2014 and 2013, respectively.

We provide retirement benefits for some of our international employees through the McDermott Global Defined Contribution Plan (the “Global Thrift Plan”), a defined contribution plan established on January 1, 2012 and operated under Luxembourg law. The Global Thrift Plan generally provides for matching employer contributions of 50% of participants’ contributions up to 6% of base salary and unmatched employer cash contributions equal to 3% of participants’ base salary. Amounts charged to expense for employer contributions under the Global Thrift Plan totaled approximately $1 million, $1 million and $2 million in 2015, 2014 and 2013, respectively.

We also provide benefits under the McDermott International, Inc. Director and Executive Deferred Compensation Plan (“Deferred Compensation Plan”), which is a non-qualified defined contribution plan. Expense associated with the Deferred Compensation Plan was not material to the Consolidated Financial Statements for the years presented.